No end to guessing game over US rates

International / 25 March 2014, 08:00am

Robin Emmott

Brussels - The guessing game over US interest rates is likely to intensify this week after Federal Reserve chairwoman Janet Yellen raised the prospect of an increase early next year, while Russia’s annexation of Crimea will keep investors focused on its next move.

In a week heavy with diplomacy – US President Barack Obama will meet Chinese counterpart Xi Jinping today – markets will seek clarity from the Fed on its monetary policy and from Russia over its intentions in Ukraine.

While the US data calendar is relatively light, Yellen has got investors talking by suggesting interest rates could start rising a year from now. Most economists expected this to begin in the second half of next year.

The question is whether the host of Fed policymakers due to speak this week – including the Chicago Fed’s president, Charles Evans – will try to distance themselves from Yellen.

“We have to consider the possibility of the first rate hike coming in April 2015,” said James Knightley at ING in London. “Market pricing still favours the third quarter of 2015, but a decent rise in employment and business activity may see this change,” he said.

Last week the Fed, in its first policy-setting meeting under Yellen, said it would factor in a wide range of economic measures as it judged the correct timing for raising rates.

Still, a survey of economists and traders shows that Yellen’s comments have not altered their views. Ten traders out of 17 polled expected rate hikes in the second half of 2015, with another four saying increases would not start until 2016.

That suggested a normalisation of US interest rate policy had yet to be factored into dollar exchange rates versus the yen and the euro, economists said.

“We can only conclude that despite all the Fed’s forward guidance and efforts to improve its communication, the Fed’s probable course of action is not fully priced into dollar exchange rates,” said Ulrich Leuchtmann at Commerzbank.

“A phase of serious dollar strength will only set in later in the year. But then it will do so with a vengeance.” – Reuters